As spring 2015 nears it’s merge into summer, it feels like the right time to begin discussing the recent events of real estate investing. I apologize, dear reader, for my recent absence from writing on The Urban Investor site. Due to the increased priority of a new musical project, I won’t be churning out the articles quite as frequently as the “grand opening” of the site. However, real estate discussion is too fun to stay away from for too long, so indeed there will be periodic posts.
The Nashville, TN market is remarkably on fire right now. According to one report ranking The Top Single-Family Housing Markets it is third in the United States, trailing only Denver, Colorado and San Antonio, Texas. But it isn’t only single-family homes that are garnering attention. Music City is teeming with new developments including condos, apartments, hotels, office space, retail and commercial projects. I wrote about my concerns for a potential housing bubble, and I still have those concerns. However, the demand for Nashville property has shown no signs of slowing down in 2015. In fact, there has only been increased demand since 2014, adding more fuel to the fire.
From an active investor’s perspective, it is a wild and exciting environment. I compare the real estate market to the food chain. Hovering around the top are multitudes of hungry home-seekers. They are waiting for new listings of quality houses they can devour. Some are buyers and some are renters. They want to live in Nashville, and they are having a hard time finding the house they want for the price they want. According to CNN, about 82 people are moving to Nashville every day. These folks are growing increasingly frustrated with the limited inventory of rentals and homes for sale. As their searches drag on, they tend to lessen their demands from their initial checklist of what they were looking for. Often they settle for a house that is either smaller, uglier, or not in the location that was originally desired. Or else they elect to pay more.
There are three primary methods for investors to take advantage of a top-heavy food chain. First are the fix-and-flip investors hunting for undervalued or distressed properties, which are renovated and sold quickly to owner occupants. Other investors are vying for these same distressed dwellings, but take a different route by holding them as rentals instead of selling. The third group of investors that has become more popular in urban Nashville are the new construction builders and developers. They are on the prowl for vacant lots, teardown houses, or favorable (in their eyes) zoning that allows more than one house per lot.
There are also some niches for investors that are more specialized, including wholesaling, lease purchases, and vacation rentals. Some investors find themselves operating neatly in one category. Others dabble in a bit of everything.
My initial real estate investments were renovations, but I began to add rentals that provided income in a much more passive manner. Now that it has been over a year and a half without doing any renovations it is clear that I no longer operate in the renovation category, which requires more work than I want to do at this point of my life. Although I have done a couple of re-subdivision projects that I sold to builders, I’m not the guy that is doing the new construction. That leaves me in the “buy and hold” rental category, and I have also carved out a little niche that I like to call DEALFINDER.
You may be asking, “What the heck is a dealfinder? I’ve never heard of that.”
Being a dealfinder is what I like most about real estate. It is where the action is for me. I enjoy doing it, so it doesn’t really feel like work. I’ve settled in at a lower level of the real estate food chain that has desperate demand and not enough supply. Just as I described the predators at the top of the chain who need a place to live, there are many investors looking for the properties to renovate, rent, or build on to feed to those buyers for profit. The good deals that these investors want are in short supply. If they are listed on the MLS, there is so much bidding competition, that the sales prices are overbid to the point that they aren’t that great of a deal. I wrote about this issue detailing why I haven’t been buying MLS listings for investment property for over a year. So what properties am I buying?
I am targeting foreclosure auctions, for sale by owners, and deals from wholesalers. I’m looking for discounted properties that have equity. I can either add them to my portfolio as rentals, or sell them to another investor.
A perfect example of being a dealfinder happened about three months ago. I closed on the purchase of a property in East Nashville in March. I was thinking it could potentially be a solid rental in a high-growth area. However, after the previous owner/hoarder moved out, I realized the house needed more work than I initially realized. No problem. Let’s just sell it. I called somebody to cut the grass, pulled up the carpet (to reveal original hardwood floors) in three rooms, and had my realtor put it on the MLS. We had a a lot of showings and a full-priced offer in the first week. I was pleased but not surprised. That is par for the course right now in Nashville. What was surprising was that the buyers wanted the house to live in. After their inspection came back revealing several issues, they backed out of the deal. The house was pretty gross, so I had envisioned an investor buying it all along. After a few weeks and dozens of showings, eventually the house did sell. Although I accepted an offer from an investor that was about $12,400 below what the first buyers were willing to pay, I still walked away with an easy profit.
Being a dealfinder has resulted in two more properties this spring. I closed on 50’s brick three bedroom home last week that will be kept as a rental, and have a small cottage under contract to close next month.
Not all real estate investment categories can sustain high margins of profit regardless of the health of the market. New construction seems to have incredible volatility. But wise investors will take advantage of opportunities in a hot market that may not be there two or three years down the line. I’m not convinced that being a dealfinder is sustainable. With a less hungry food chain, I might get stuck with the gross rental house and not be able to unload it for a profit. I understand that risk, and I’m willing to work my niche while it’s available, knowing that I have the more steady long-term rentals in place. As some well-educated person from the south once said, “Get while the gettin’s good!”